This involves the use of decision trees.
A decision tree is a graphical representation of a decision process indicating decision alternatives, states of nature, associated probabilities and conditional payoffs for each combination of a decision alternative and a state of nature.
Illustration 2:
Assume that a Software Company has just won a contract worth
80,000ifitdeliversasuccessfulproductontime,butonly40,000 if it is late. It faces this problem now of whether to produce the software of to subcontract at a cost of
50,000.Thesubcontractorissoreliablethatitiscertainitwillproducethesoftwareontime(prob.1)Ifthesoftwareisproducedin−housethecostwillbe20,000 but based on past experience there is only a 90% chance that a successful product is produced. In the event of the software not being successful, there would be insufficient time to re-write the whole package internally. However, there would be the option of late rejection at an extra cost of
10,000orlatesub−contractingonthesametermsasbefore.Withthelatesubcontractingthesub−contractorhasa5050,000 regardless of whether he meets the deadline or not.
Required:
Using a decision tree advice the manager.
Titany answered the question on
October 12, 2021 at 05:12